For many, an IRA represents a major component of their personal financial portfolio.  Transferring an IRA (or any qualified plan) to loved ones can create estate planning opportunities, or potential problems, depending on the decisions that are made.

Federal law allows IRA owners to name “beneficiaries” of their IRAs who may then opt to receive their inherited IRAs over their entire life-expectancy period by utilizing the (minimum distributions for beneficiaries) recalculation rules.  When chosen, the recalculation-for-minimum-distributions option can be of much value to most IRA inheritors.  The question is whether or not the minimum distribution options are eventually chosen by the IRA beneficiary – or at least utilized at some level – or just totally ignored to opt for the one-time (taxable) lump sum distribution of the entire value of the inherited IRA.  Through the use of a properly constructed qualifying trust, a parent/IRA owner can control that outcome.

The ultimate choice made can have a significant impact on an IRA beneficiary’s life.  For example, the current actuarial life expectancy of an American male aged 27 is 77 (= 50 years).  If a 27-year-old male were to become the beneficiary of an inherited IRA worth $250,000 and opt for minimum distribution payouts then the first year distribution amount would be $5,000 ($250,000 ÷ 50) taxed as ordinary income at his income tax rate.  The remaining $245,000 would stay in the IRA vendor’s custody where it can be (re)invested and grow tax free – as it had been doing all along when the taxpayer/owner was living.  The divisor values used to determine the required minimum distribution (RMD) rate for each consecutive year thereafter is the remaining number of years of the beneficiary’s life expectancy at that given year.

In addition to the obvious tax-savings and the leveraged, long-term benefits of not taking an upfront lump sum distribution from an inherited IRA, there is another consideration involving spendthrift issues.  Very often, young and even middle-aged adults do not demonstrate adequate levels of sophistication when it comes to financial decision making.  In fact, handing over access to a large sum of money can prove burdensome or even financially destructive to a recipient who is unable to properly handle the responsibility of immediate wealth.

Through proper estate planning with a trust, an IRA owner protect against (a) the potential of having a personal IRA account wastefully spent-down at a future date, (b) the possibility of creating adverse effects on a beneficiary’s life because of a financial bonanza, (c) the complete loss of otherwise available income-tax savings and account growth leveraging techniques, and (d) the potential adverse influence of a spendthrift son/daughter in-law who doesn’t share the IRA owner’s family monetary values.  There is only one way an IRA owner can exercise post-mortem control over the IRA and that is with the use of a trust.

If a trust is constructed in compliance with Treas.  Reg.  §1401(a)(9)-4, it can qualify as a Designated Beneficiary Trust (DBT) also known as a “see-through” or “conduit” trust; your MLCP trust format has been designed to qualify as a DBT.  (NOTE: your MLCP trust also allows for your successor trustee to perform a “trustee rollover” of your 401k account, if you have one, into your IRA.) Through the use of this App, you can mandate IRA allocation terms concerning future access by your beneficiaries to your IRA at whatever levels – starting at the Required Minimum Distribution rate – and/or length of time you deem wise and suitable in light of your family conditions.